With the likely increased borrowings or refinancing of debt as a result of the COVID-19 crisis, multinational companies should consider the impact of changes in U.S. tax law made in 2018. As a result of these changes, U.S. parented multinational groups wanting to maximize the global tax benefits of their borrowing are more likely to need certain non-U.S. affiliates to also directly borrow from the group's lenders. Non-U.S. parented multinationals may need to consider having their U.S. affiliate borrow directly from third party lenders or otherwise structure any lending to the U.S. affiliate in a manner that allows the U.S. affiliate to claim most of its U.S. interest deductions and not be subject to additional tax on base erosion payments.

While every multinational group will have its own unique considerations, summarized below are three changes in U.S. tax law in effect since 2018 to consider in maximizing the tax benefit of borrowing: (i) the adoption of broadly applicable interest expense limitations similar to those adopted in many other countries, (ii) an anti-base erosion tax imposed on otherwise deductible payments of interest from U.S. corporations to certain non-U.S. related parties and (iii) the reduction of the U.S. corporate income tax rate relative to the tax rates of other countries.

Considerations for US Parented Multinational Groups

As part of the Tax Cuts and Jobs Act (TCJA),1 the United States enacted new interest deductibility restrictions under an updated section 163(j). Under section 163(j), net business interest expenses (i.e., after offsetting business interest income) generally can only be deducted up to the 30% of the taxpayer's adjusted taxable income on an annual basis. The limitation applies to all deductible interest, including interest that is original issue discount. Adjusted taxable income is the taxable income of the taxpayer, computed without regard to interest, net operating loss deductions, if any, and the section 199A deduction for certain qualified business income. For taxable years beginning before January 1, 2022, adjusted taxable income is computed without regard to depreciation, amortization and depletion (i.e., similar to EBITDA). Beginning on January 1, 2022, adjusted taxable income will take into account depreciation, amortization and depletion (i.e., similar to EBIT).

Interest expense that cannot be deducted in the taxable year in which it is incurred can be carried forward indefinitely, and any carried-forward interest deductions may be used in subsequent years subject to the general 30% adjusted taxable income limitation in such years.

In November 2018, the IRS and Treasury Department issued proposed Treasury regulations that include detailed provisions regarding section 163(j). Among the proposals was one that would extend the application of section 163(j) to controlled foreign corporations (CFCs). While CFCs themselves are not subject to tax on income that is not effectively connected to a U.S. trade or business, the application of section 163(j) to CFCs can impact their U.S. shareholders inclusions of global intangible low taxed income (GILTI) or subpart F income. Final Treasury regulations have not yet been issued, but are expected in 2020.

U.S. parented multinationals also need to consider the impact of borrowing on their GILTI and other foreign source income. In general, interest expense is treated as fungible for purposes of allocating expenses in the calculation of foreign tax credit limitations. As a result, borrowing at the U.S. parent will often reduce its foreign tax credit limitations in various baskets. This can result in the U.S. parent having increased GILTI tax liability without any change in the income of its CFCs or the amount of the foreign taxes they pay.

Consequently, U.S. parented multinational groups should consider the impact of section 163(j) on their borrowing at the U.S. parent level. A U.S. parent corporation that borrows funds from third parties and engages in intercompany on-lending of funds to non-U.S. subsidiaries may be subject to the interest deduction limitation under section 163(j). Having the non-U.S. subsidiaries borrow directly may avoid the application of section 163(j), although similar interest limitation rules of the jurisdictions of such subsidiaries would need to be considered as well as lenders could lend into any applicable jurisdiction without the imposition of material withholding taxes. In addition, assuming the IRS and Treasury Department finalize proposed section 163(j) regulations extending the application of section 163(j) to CFCs, U.S. parented multinationals will need to consider the impact of any borrowing by CFCs on their GILTI or subpart F income. Finally, collateral consequences to GILTI and other foreign source income inclusions should be considered as well.

Considerations for Non-US Parented Multinational Groups

A non-U.S. parented multinational group that borrows solely at the non-U.S. parent level or through another non-U.S. affiliate for its U.S. subsidiary will generally borrow funds from third parties and then loan those funds to one or more of its U.S. subsidiaries. As discussed above, section 163(j) applies to limit the amount of interest that is deductible by a U.S. taxpayer. As a result, the interest paid by the U.S. subsidiary to the non-U.S. parent will be subject to limitations under section 163(j), although section 163(j) would have the same impact if the U.S. subsidiary directly borrowed from third parties.

However, having the U.S. subsidiary borrow from a non-U.S. affiliate rather than directly from third parties implicates the Base Erosion and Anti-Abuse Tax (BEAT) added by the TCJA. Under the BEAT, a corporate taxpayer that satisfies certain conditions will have an additional tax of 10% for tax years beginning after December 31, 2018 through December 31, 2025 (12.5% for tax years beginning after December 31, 2025) that is generally imposed because of certain base erosion payments. A corporate taxpayer is subject to the BEAT if its gross receipts are $500 million or more of average annual gross receipts during the three prior taxable years and the taxpayer generally makes a certain number of base erosion payments compared to the aggregate amount of its deductions. A base erosion payment is a payment to a non-U.S. related party with respect to which a deduction is allowable. Therefore, in the event that a non-U.S. affiliate lends to its U.S. subsidiary, the U.S. subsidiary's payments of interest to the non-U.S. affiliate may be subject to the BEAT that would increase the costs of such borrowings. Non-U.S. parented multinational groups, however, may avoid a BEAT liability with careful structuring to avoid treating an interest payment to the non-U.S. parent as a base erosion payment.

Impact of Tax Rates

For many years prior to 2018, both U.S. parented and non-U.S. parented multinational groups generally tried to maximize interest deduction in the United States because it imposed one of the highest corporate tax rates in the world. This increased the value of interest deductions in the United States relative to the value of interest deductions elsewhere. In 2018, the United States enacted the TCJA, which reduced the United States corporate income tax rate from 35% to 21%. In contrast, while the corporate tax rate among members of the Organization for Economic Co-operation and Development is approximately 23%, other countries such as France, Germany, Mexico and Japan all have corporate tax rates that range from 29% to 34%.2 In addition, many countries, including the United States, have rules that can make it more difficult to claim interest deductions on related party loans than on loans from third parties. As a result, many multinational groups will want to consider having non-U.S. affiliates act as direct borrowers from third parties even if they have never done so in the past.


As U.S. parented and non-U.S. parented multinationals consider new borrowing to fund their operations as a result of the COVID-19 crisis, they need to consider the U.S. tax considerations have changed with the enactment of the TCJA, which reduced corporate income tax rates, imposed new limitations on the deductibility of interest and enacted the BEAT. As companies consider their borrowing options, planning opportunities may exist to maximize the tax benefits of their borrowings.

Please contact any member of the Shearman & Sterling LLP Tax team for further information.


1 Pub. L. No. 115-97 (2017).
2 Corporate tax rates for a particular country can be obtained from the OECD at https://stats.oecd.org/Index.aspx?DataSetCode=CTS_CIT.

Special thanks to Alex Liebmann for his contributions to this client publication.

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